The Executive Board of the International Monetary Fund (IMF) is scheduled to meet on December 19 to consider providing a loan to Sri Lanka through its Rapid Finance Facility, according to a notice published on the IMF’s website.
Sri Lanka was impacted by Cyclone Ditwah in late November, prompting the government to announce that spending for the following year will increase by at least 500 billion rupees. This development has significantly altered the country’s budget outlook for 2026.
An IMF team is expected to visit Sri Lanka in January 2026 to renegotiate a staff-level agreement in accordance with the revised fiscal situation.
Despite a rate cut in March and a generally less restrictive monetary policy, the Central Bank of Sri Lanka has not been able to build reserves to the extent initially expected. Nevertheless, both government and central bank reserve-related debts have been repaid.
In December, several budget support loans—primarily from the Asian Development Bank—were approved. These loans, which do not involve domestic spending, are expected to bolster reserves or assist in debt repayment.
The central bank is currently supplying US dollars to the government for debt repayment purposes.
Analysts have cautioned that Sri Lanka cannot base its interest rate decisions solely on historical 12-month inflation data. Given the central bank’s responsibility to accumulate reserves and service debt, interest rates are influenced by domestic credit conditions and reserve targets, which are determined after debt obligations are met.
The Sri Lankan rupee has depreciated in 2025 amid a less restrictive monetary stance and increased purchases of US dollars by the central bank, which some analysts note has resulted in selective restrictions on foreign exchange availability for private importers.
Sri Lanka defaulted on its debt in 2022 following a period of aggressive macroeconomic policy, including interest rate and tax cuts aimed at achieving full employment, a strategy often referred to as “full employment policies.”
